As the year draws to a close, we have seen a flurry of regulatory activity. The US has been particularly active in December releasing virtual currency guidance to banks, amending the State Department Basic Authorities Act of 1956 to include information on crypto rewards and payouts. Two new regulatory bills for crypto exchanges were also introduced in direct response to the ongoing revelations about FTX. The UK and the EU were also active with the UK currently finalizing a package of regulations for cryptocurrencies, while the EU Commission introduced proposals on crypto assets tax transparency.
Read more below:
New York Department of Financial Services releases virtual currency guidance for banking organizations
On December 15, 2022, the New York Department of Financial Services (DFS) released guidance to banks to provide a framework for assessing factors that should be considered when implementing virtual currency activities in New York. It also reminds covered institutions that they must seek prior approval before engaging in certain activities related to virtual currency, and includes a variety of categories that will be used by the Department to evaluate a covered institution’s proposal.
Included in the guidance is a checklist that a covered institution should provide to the Department in order to evaluate its proposal. To develop the guidance, the Department conducted a comprehensive analysis of the regulatory landscape and the market trends related to virtual currency. It also consulted other regulators and academic institutions.
Although the guidance is final, the Department will continue to engage with its stakeholders to develop the next steps in the regulation of virtual currency. As part of this process, the Department will review the comments received on the guidance and continue to update the supervisory framework that will apply to covered institutions.
The UK is currently finalizing regulations for cryptocurrencies
The UK Treasury is currently working on a package of regulations aimed at regulating the cryptocurrency industry. On December 7, 2022, the UK government passed its amendments, which included several related to crypto asset regulation.
The Financial Services and Markets Bill (FSMB) will give the Financial Conduct Authority (FCA) more responsibilities for regulating the operations of crypto asset providers. The bill also establishes the framework for recognizing stablecoins as a payment method. The regulations are expected to have a broad impact on the industry.
The regulations will require crypto platforms to get approval from the FCA before they can advertise in the UK. They will also require all marketing materials to carry a risk warning. This will give the FCA more power to prevent misleading and deceptive advertising.
The FCA will also be able to create new financial market infrastructure sandboxes by disbursing or modifying specific legislation for certain purposes. These will allow the testing of blockchain tech in the market.
In addition to the FSMB, on December 7, 2022, the Treasury Committee held a separate meeting to discuss the various risks associated with investing in crypto. It covered topics such as non-fungible tokens and crypto lending.
Hong Kong Crypto AML Regulation and Licensing Regime Requirement
On December 7, 2022, in Hong Kong the Anti-Money Laundering and Counterterrorist Financing (Amendment) Bill 2022 was passed by the Legislative Council. The bill provides a licensing regime for virtual asset service providers
Consequently, the Securities and Futures Commission (SFC) announced its requirements for those who are involved in the virtual asset trading industry to meet anti-money laundering and counter-terrorist financing (AML/CTF) amendments which include:
- carrying out due diligence and recording information related to their customers to avoid conflicts of interest and ensure that their clients’ assets are secure
The SFC also requires that:
- licensed virtual asset exchanges and their subsidiaries submit their financial information and audited accounts regularly
- in order to carry out inspections, the agency can enter the business premises of these entities
- the amendments will come into effect on June 1, 2023
U.S. lawmakers propose crypto payout disclosure
On December 6, 2022 United States lawmakers proposed an amendment to the State Department Basic Authorities Act of 1956 that includes information on crypto rewards and payouts.
The goal of the amendment is to encourage more whistleblowers to come forward and report instances of corruption, fraud, and illegal activity within the State Department. It will provide transparency regarding the department’s spending on payouts and rewards related to cryptocurrencies. If the amendment is passed, the policy would provide insight into the government’s stance on the cryptocurrency’s use for illegal and corrupt activities.
The amendment states that the Secretary of State should notify the Foreign Affairs Committee and the Senate Foreign Relations Committee about the types of rewards that can be offered in a form of cryptocurrency not later than 15 days.
The amendment also requires the State Department to provide a report to the Foreign Affairs Committee and the Senate Foreign Relations Committee about the use of cryptocurrencies as rewards within a period of 180 days of the enactment of the act.
The report should include a justification for using cryptocurrencies as a reward method and include evidence that would suggest that the use of cryptocurrencies as rewards leads to more whistleblowers coming forward. This would be different from the other types of rewards, such as those paid in the US dollar.
New regulatory bill for crypto exchanges in the United States House of Representatives
On December 2, 2022, New York democrat Ritchie Torres introduced two bills – the Crypto Consumer Investor Protection Act and the Crypto Exchange Disclosure Act – in the United States House of Representatives.
The first act states that a cryptocurrency exchange may not lend, leverage, or co-mingle the funds of a customer without the consent of such customer. The second regulation aims to require a cryptocurrency exchange to regularly disclose information related to the assets it holds for its customers to the Securities and Exchange Commission (SEC).
The two bills introduced in response to the collapse of FTX are aimed at creating new regulations for the cryptocurrency exchange industry. One of these would prevent exchanges from providing their customers with funds without their permission. The other would require them to provide the government with the size of their liabilities and assets.
EU Commission proposal on crypto assets tax transparency
On December 8, 2022, the European Commission proposed new tax transparency rules for all service providers facilitating transactions in crypto assets for customers resident in the European Union. These complement the Markets in Crypto-assets (MiCA) Regulation and anti-money laundering rules.
The EU Commission announced that the proposal will be an amendment to the Directive for Administration Cooperation (DAC8), which will be consistent with the OECD initiative on the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS). This will be helpful for businesses by seeking to reduce to many potentially conflicting reporting standards/frameworks.
The proposed Directive aims to improve the ability of European tax authorities to detect and prevent tax evasion, fraud, and tax avoidance. It requires all service providers that provide crypto assets to report the transactions of their clients in the EU. It also sets a minimum standard for penalties for serious non-compliance. In addition, the Commission proposed extending the reporting requirements of financial institutions for e-money transactions and digital currencies. It also suggested expanding the scope of information exchange to enable cross-border transactions by high-net-worth individuals.
Ahead of these regulatory updates, compliance teams should ensure they can collect and hold data in a standardized format to provide originator and beneficiary information to relevant bodies when required.
The Regulatory & Compliance team at Crystal Blockchain includes experts from financial services and regulators. We are hands-on professionals with experience in helping you to transform regulation into effective risk management.
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